By Victor Baron, CEO & Founder, Ampere
The UK’s business population is falling. Between 2022 and 2023 there has been a 1.5% drop in the number of businesses which pay VAT and/or PAYE contributions, covering about half of the UK’s overall business headcount. It’s highly likely that the challenging economic environment is behind the difficulties many have faced – but it’s even more likely that the UK’s SMEs, many of which don’t pay VAT or make PAYE contributions, are suffering even more.
According to the Government’s latest statistics, published in October 2022, 99.9% of the UK’s 5.5 million private sector businesses are SMEs, and three quarters don’t employ anyone apart from the owner. These 5.5 million firms account for 60% of the employment and around half of private sector turnover, providing 16.4 million jobs and generating £2.1 trillion in revenue.
However, Statista data from 2022 shows that only 27% achieved growth in the previous 12 months. There was little variation between sectors – an optimistic observer might suggest that this represents equal opportunity for growth across industries, but in fact it’s much more likely that businesses are all facing the same challenges.
Rising inflation and widespread increases in costs across the board certainly had an impact – but it was the surge in interest rates and borrowing costs which put the brakes on investment for those companies which aimed for growth. This is because credit became much harder to acquire, with many banks turning cautious and the costs of debt skyrocketing.
But credit is an essential ingredient for SME growth – and the banking industry needs to innovate in order to provide the fuel for the UK’s economic engine room to thrive.
The importance of credit
Compared with their larger counterparts, SMEs rely far more on credit and external finance for a range of their business operations. What’s more, when it comes to making big short-term or even long-term investment in facilities, equipment or personnel, the vast majority don’t have the cash reserves to simply spend on demand.
To date the banking industry has created a number of products to facilitate this borrowing: from start-up loans and working-capital loans to green loans and equipment, finance is available. However, it is not easy to access, and therein lies the problem.
Published in December 2022, research from the Federation of Small Businesses shows that just 37% of SMEs find the loan application process easy and less than a third find it easy to speak with the right people to get help with applying.
Innovating to find solutions
It’s clear that there are barriers between SMEs and the financing available which must be broken down, and responsibility rests with the banking industry to find ways to do so. This is imperative at a time when macroeconomic conditions have been at their most turbulent for many years, and when pressure to be ‘greener’ and begin transitioning to Net Zero is building.
The first step is to make applying for funding quicker and simpler. In a time where APIs streamline the sharing and interoperability of financial data, and when lots of corporate processes are digital-first and efficient, there’s no reason why SMEs shouldn’t be able to apply for a loan with a few clicks.
Then, the next change must be attitudinal. It’s understandable that banks and lenders are currently cautious, but while economic growth has stagnated and might even turn to recession, empowering the nation’s SMEs could provide a shot in the arm to the UK economy – or at least play a part in shifting the momentum. This isn’t something any one lender can do on its own and requires support and leadership from Government, but it is a choice that can be made if the willingness is there.
Part of the problem is lenders’ approach in relation to current and accumulated liabilities. As things stand, many banks err heavily on the side of caution – but shifting mindsets to be more open, reasonable and cooperative would be an immediately impactful change.
Being a long-term partner
We must acknowledge that funding can only do so much – after all, planting a seed is just the beginning; nurturing it is the key to growth.
That means being a real partner to the businesses which borrow to grow, through day-to-day banking support and core services, with the benefits that using the same provider for everything can bring; but it also means giving genuine counsel about financial decisions so that funding turns into sustained and sustainable growth.
It also means taking real action when it comes to making credit more accessible and leading by example. We understand how important this is and know that there is will in the industry to make positive change and give SMEs the funding they need to survive and, ultimately, grow.